Corporate Finance (8%)

Question 1

WACC

Answer 1

w_d[k_d(1-t)] + w_psk_ps + w_cek_ce

w(after tax cost of debt) + w(cost of preferred stock) +

w(cost of common equity)

Question 2

After Tax Cost of Debt

k_d

Answer 2

k_d(1 - t)

Market interest rate (YTM) at which firms can issue new debt (k_d) net of the tax savings.

Question 3

Cost of Preferred Stock

k_ps

Answer 3

D

———

P

Question 4

Cost of Common Equity

k_ce

CAPM Model

Answer 4

[E(r_mkt) - r_rf]ß + r_rf

Question 5

Cost of Common Equity

k_ce

Dividend Discount Model

Answer 5

k_ce = (D₁ / P) + g

or

P = D₁ / (k_ce - g)

Question 6

Growth Rate

g

Answer 6

RR * ROE

(1-dividend payout)*ROE

Question 7

Retention Rate

RR

Answer 7

1 - Payout Rate

Question 8

Profitability Index

PI

Answer 8

• NPV / CF₀ + 1
• If PI>1 accept project
• If PI<1 reject project
• Remember NPV calc is for future cash flows only.

Question 9

Break Point for

Marginal Cost of Capital

MCC

Answer 9

$ Amount of Debt or Equity at the Change

——————————————————————

Weight of Debt or Equity

Question 10

Bank Discount Yield

BDY

Answer 10

[(par - purchase) / par] *(360/n)

Question 11

Cost of Trade Credit

(Payables with discounts)

Answer 11

(1 + %Disc/(1 - %Disc)^(365/n) - 1

The cost of not paying based on discount terms

eg:2/10 net 40

Question 12

Money Market Yield

r_mm

Answer 12

(F / P)%Discount

Question 13

Operating Cycle

Answer 13

DOP + DOH

Question 14

What is an A/R aging used for?

Answer 14

1. identify trends in how well the firm is doing at collecting receivables and turning them into cash.

Question 15

Cost of Common Equity

k_ce

Bond-Yield-Plus-Risk-Premium Approach

Answer 15

k_dbt + Risk Premium

or

[k_d/(1 - t)] + Risk Premium

Before tax cost of debt plus risk premium of equity over debt.

Question 16

What is the purpose of the audit commitee?

Answer 16

• ensures that financial info provided to shareholders is complete, accurate, reliable, relevant, and timely.
  
  • make sure no management influence.
  • conflicts btwn external auditor and firm resolved in manner that benefits shareholders.
  • commitee are financial experts
    *

Question 17

What is the purpose of the renumeration/compensation commitee?

Answer 17

should be independent board members that set executive compensation, commesurate with responsibilities and performance.

*

Question 18

purpose of nominations commitee?

Answer 18

they recruit qualified board members.

*

Question 19

Cash Flow Forecasting Techniques

Answer 19

Short Term

• Simple Projections

Medium Term

• Project Models & Averages

Long Term

• Statistical Models

Question 20

Degree of Total Leverage

DTL

Answer 20

(Revenue - Variable Costs)

——————————————

Net Income

Question 21

What is a poison pill

Answer 21

way a company can dilute shares to prevent a hostile takeover.

Question 22

Optimal Capital Budget

Answer 22

The amount of new capital required to undertake all investment projects with an IRR greater than the MCC.

MCC = IOS

The point where the Marginal Cost of Capital (MCC) intersects the Investment Opportunity Schedule (IOS)

Question 23

The amount of new capital required to undertake all investment projects with an IRR greater than the MCC.

MCC = IOS

The point where the Marginal Cost of Capital (MCC) intersects the Investment Opportunity Schedule (IOS)

Answer 23

Optimal Capital Budget

Question 24

Business Risk

Answer 24

Sales Risk + Operating Risk

Question 25

Asset Beta

ß_Asset

Answer 25

ß_EQ

——————————

1 + (1 - t)(D/E Ratio)

Question 26

Equity Beta

ß_Equity

Answer 26

ß_Asset^*[1 + (1 - t)(D/E Ratio)]

Question 27

degree of operating leverage?

Answer 27

DOL =

REV - Variable operating costs

REV- variable operating - fixed operating

Question 28

net income

Answer 28

EBT (1-tax rate)

Question 29

Degree of Operating Leverage

DOL

Answer 29

Q * Contribution

—————————————

Q * Contribution - Fixed

Question 30

country equity premium?

Answer 30

sovereign yield spread * annualized standard dev of equity index/annualized stadard dev of sovereign bond